Oligopoly Dynamics with Barriers to Entry

43 Pages Posted: 22 Dec 2006

See all articles by Jaap H. Abbring

Jaap H. Abbring

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER); Tinbergen Institute; IZA Institute of Labor Economics

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Date Written: November 2006

Abstract

This paper considers the effects of raising the cost of entry for potential competitors on infinite-horizon Markov-perfect industry dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last-in first-out expectations: a firm never exits before a younger rival does. When an industry can support at most two firms, we prove that raising barriers to a second producer's entry increases the probability that some firm will serve the industry and decreases its long-run entry and exit rates. In numerical examples with more than two firms, imposing a barrier to entry stabilizes industry structure.

Keywords: LIFO, FIFO, Sunk costs, Markov-perfect equilibrium

JEL Classification: L13, L41

Suggested Citation

Abbring, Jaap H. and Campbell, Jeffrey R., Oligopoly Dynamics with Barriers to Entry (November 2006). FRB of Chicago Working Paper No. 2006-29, Available at SSRN: https://ssrn.com/abstract=953223 or http://dx.doi.org/10.2139/ssrn.953223

Jaap H. Abbring (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Jeffrey R. Campbell

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

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